Greater Phoenix Real Estate Update 4/2/2021

The human condition versus efficiency.

Real estate disruption is all about creating efficiency. As we lead busier and busier lives, fast and efficient is appealing, right? In theory, buying and selling a property with Amazon-like ease sounds great. In reality, our human condition drives us to desire human input, not just in reading interesting articles but in being able to talk to someone about specifics.

For example, in a recent HousingWire article about where Realtors fit into Zillow’s plans, Matthew Blake writes, “Zillow wants to do it all in real estate. And the role of agents in this isn’t nothing. But agents’ role seems more like one worker on an assembly line, instead of a hand-holder amid the dynamic, stressful and inefficient process that is the home sale.” Does an assembly line strategy best serve the consumer? Unlikely. Yes, the industry definitely has inefficiencies to improve but in order to create greater efficiency do we also have to give up individual guidance for the consumers who want it? I don’t think so.

On Tuesday, Brad Inman wrote, “In this fast-changing world, the digital face off will become more pronounced for the consumer. Advertising dollars are flowing into the digital alternatives, giving the customer more choices with a mix of competing benefits. Efficiency versus human touch; higher versus lower fees; and the old way versus something new and often untested.”

IPOs, SPACs, and Unicorns:

• Knock hired Goldman Sachs to take them public either via IPO or SPAC with a goal of a $2 billion valuation.
• Compass successfully completed its IPO and went public yesterday giving it an $8 billion valuation and about $450 million in capital (roughly half of the goal outlined in the initial S-1 filing). Investors and real estate professionals alike are closely watching Wall Street’s reaction to the IPO. Compass has positioned itself as a tech company like Redfin or Zillow with valuations of $28.7 billion and $32 billion, respectively. But many in the industry consider it a traditional brokerage more like Realogy with a valuation of $1.78 billion or RE/MAX with a valuation of $1.19 billion. (despite the huge variation in valuations Realogy and RE/MAX are profitable while the others aren’t) While it is not unusual for valuations to fluctuate, we will soon know how Wall Street defines Compass.
• WeWork, a co-working company, announced it is going public via SPAC in Q3 2021 with an expected valuation of $9 billion. In 2019 WeWork attempted and failed to go public via IPO and its valuation dropped from $47 billion to $3 billion.
• To be considered a “unicorn” a company must reach a $1 billion valuation (there are about 600 on the planet) and the frequency of real estate tech companies reaching unicorn status is increasing, here are three examples:
  • Side a back office brokerage and technology platform that keeps teams and agents front-facing.
  • Pacaso creates co-owner opportunities for second homes.
  • Divvy Homes offers rent to own solutions and down payment options.

National Real Estate:

• Pending home sales declined by 10.6% from January to February; mostly due to low inventory.

“The demand for a home purchase is widespread, multiple offers are prevalent, and days-on-market are swift but contracts are not clicking due to record-low inventory. Only the upper-end market is experiencing more activity because of reasonable supply. Demand, interestingly, does not yet appear to be impacted by recent modest rises in mortgage rates.”

-Dr. Lawrence Yun, NAR’s chief economist

• Demand increased in March as people rushed to lock in their rates as they rose. It is too early to see the true impact the rising interest rates will have on buyer demand.
• After two weeks of staying relatively flat, this week’s active single family listings nationwide decreased by about 3,000 listings to 312,872.

• According to Realtor.com, nationwide, the median sales price in March reached $370,000; up 15.6% year over year. The highest median sales price ever, even above the highs of the 2005 bubble.
• Asking prices for new listings has just started to level off after the giant run-up. Leveling off at the end of March/early April is normal seasonal behavior. We will likely see it start to fall towards the end of April, which is also part of the normal seasonal real estate cycle.

• Price reductions increased slightly to 16.3% from last week’s all-time low of 16.1%. The number of price reductions is a great way to gauge buyer demand, which based on these numbers remains extremely high.

“Only higher rates will result in more days on the market and thus larger inventory. We need these two things in order for buyers to have more choices and more reasonable price growth. Again, the question remains if rates will get high enough to have this effect on the market before more price damage is done. Right now home prices aren’t high enough to impact demand in a major way.”

-Logan Mohtashami, HousingWire’s lead analyst

• As sales prices climb, homeowner equity rises too. According to this chart homeowners in CA and VT have the most equity. It also shows that 32.5% of Arizona’s homeowners have at least 50% equity.

• Redfin created this profile of a pandemic homebuyer compared to past homebuyers.

The AZ Market:

Cromford Market Index (CMI): Is the best leading indicator available (balance is 100, above 100 is a seller’s market, below 100 is a buyer’s market, prices rise at 110, and drop at 90). Yesterday it was 502.7. On 3/20/2020, it reached the pre-COVID peak of 241 and on 5/15/2020 it bottomed out at 145.2 and started increasing continuously until 3/14/2021 when it reached 514.9. It was then that demand continued decreasing while inventory finally stopped dropping, albeit at 78% below normal. As of yesterday demand is 11% above normal.

The supply versus demand imbalance has pushed the median sales price up to $358,250 giving us a 19% year over year appreciation.

The Milken Institute recently published a report ranking top US cities. The ranking is based on jobs, wages, tech growth, housing affordability, and broadband access. Phoenix ranked #7 and is the largest population. Phoenix isn’t just for cowboys, retirees, and spring break. We have a growing high-tech economy with a highly educated workforce.

Lending:

• For more on forbearance, foreclosures, and inflation check out my update from Wednesday, here.
• Purchase mortgage applications declined last week by 1% week over week, mostly due to low inventory. They are 39% higher, year over year. Throughout April, year over year numbers will be will not be a good market indicator since last April we were on lock down and had a curfew.
• Freddie Mac announced yesterday that despite the low interest rates, buyer demand has started to pullback. At the beginning of 2021 demand was 25% above pre-pandemic levels and now demand is at 8% above pre-pandemic levels.

“We even see that purchase demand is diminished today as compared to late May and early June of 2020, when mortgage rates were the same level. This is confirmation that while purchase demand remains strong, the marginal buyer is feeling the affordability squeeze resulting from the increases in mortgage rates and home prices we’ve experienced in recent months.”

-Sam Khater, Freddie Mac’s chief economist

Federal Policy:

Real estate groups are praising President Biden’s proposed $2 trillion infrastructure plan because it of its focus on housing. The plan calls for funding for repairs and upgrades to buildings, roads, bridges, the electrical grid, water systems, and more including:

• $213 billion for affordable housing.
• $40 billion to improve public housing.
• $20 billion in tax credits for affordable housing.
• $10 billion to modernize federal buildings.
• Create grant programs for cities and towns that remove barriers for building affordable housing (like exclusionary zoning laws).

Real Estate News:

• CDC extends the national eviction moratorium through June 30, 2021. This is the third extension of the ban. The CDC extended the ban due to a recent increase in COVID cases.
• Marketing platform, BoomTown acquired Brokermint, a transaction management and accounting platform in an effort to offer more of an end-to-end solution.
• Dan Gilbert, chairman of Rocket Companies, is making a $500 million “philanthropic investment” in Detroit over the next 10 years.

Final Thoughts:

The real estate market will not stay like this forever. Today the story of a $275,000 fixer in suburban DC that received 88 offers, 76 of which were cash, and 15 sight unseen and sold for $460,000 is surprising. Six months ago it would have been shocking. A year ago, no one would have believed it.

Inventory will increase, appreciation will slow, buyers will once again have options, and sellers will list their houses without the fear of having nowhere to go.

As Ella, my family’s nanny, reminds us regularly, this too shall pass. Strike while the iron is hot, save for tomorrow, and hope for the best.

Copywrite Sarah Perkins 2021